Dairy prices are expected to remain elevated in the near term but the longer-term outlook is less certain as the Russia-Ukraine conflict creates uncertainty in markets, Rabobank’s latest dairy report says.
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Weather-related issues, high or rising production costs and lingering disruptions from Covid-19 resulted in milk production growth faring worse than previously expected in the final quarter of last year.

Those challenges had affected dairy farmers from all the key production regions and among the top seven dairy exporters — New Zealand, Australia, the EU, the US, Uruguay, Brazil and Argentina — production was now expected to fall 0.7% year on year in the first half of 2022, Rabobank senior agricultural analyst Emma Higgins said.

That had further increased the global milk supply deficit and led to soaring dairy commodity prices and significantly higher farm-gate milk prices across the major export regions. Potential further upside in milk price remained, the recent strength in global commodity prices yet to affect farm-gate milk prices in some regions, Ms Higgins said.

The report said rising milk prices were failing to induce greater production and the supply deficit was unlikely to go away in the near term.

Rabobank has increased its forecast New Zealand farm-gate milk price for the 2021-22 dairy season to $9.70 a kg of milk solids.

The lower-than-expected milk production both within New Zealand and globally supported a milk price forecast around the midpoint of Fonterra’s current range of $9.30/kgMS-$9.90/kgMS, Ms Higgins said.

Looking towards the 2022-23 season, the pricing outlook was much less certain, and hinged on consumer behaviour and normalised market conditions, both of which were very unpredictable within a setting of the escalating Russia-Ukraine conflict, she said.

“We expect global dairy commodities to stay elevated through to the middle of the year amid the constrained global supply. But with inflationary pressure running rampant around the world, and expectations for global economic growth beginning to slow, this begs the question: how high will dairy prices go and for how long will they stay there?”

One of the key initial impacts of Russia’s invasion of Ukraine was increased global food security concerns, Ms Higgins said.

“These concerns have played a role in lifting dairy prices higher. And we do see these concerns remaining to the fore with buyers over coming months, adding upside weight to dairy commodity prices for the new season.

“However, the situation is evolving rapidly and we also need to consider the possibility that China could support Russia and expose itself to sanctions, which in turn could be applied to 25% of global dairy product. Should this eventuate, it would create a dire situation for China and its trading partners, with New Zealand hardest hit given it would need to find alternative markets for nearly 40% of its dairy exports.

“The Russia-Ukraine conflict also escalates an already high-cost situation. Russia and Ukraine are major players in global trade of grains, energy and metals and we anticipate more upside to come for farm inputs like grain, oil, natural gas and fertiliser over time,” Ms Higgins said.

Earlier this week, ANZ revised its farm-gate milk price forecast for the 2021-22 season up another 40c to $9.70/kgMS and upped its 2022-23 season forecast from $8.40/kgMS to $9.30/kgMS.

The bank said the risk of a sharp downwards correction in dairy commodity prices in the near term was very low as much of this season’s product had already been sold.

Dairy products were now becoming extremely expensive for consumers, particularly those in developing nations, who spent a large portion of their income on food.

“Eventually, this will impact demand, but for now we are still seeing solid demand for dairy commodities despite the excessively high prices,” it said.

For next season, it expected dairy commodity prices to remain at high levels at the beginning of the season but believed it was unlikely prices would stay at such lofty levels as the season wore on.

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